Diffrence between present values of future cash, Financial Management

Q. Diffrence between present values of future cash ?

The difference among the present values of future cash inflows generated by an asset and its cost is known as net present value.

  • A financial asset or else a project which has a positive NPV create wealth for shareholders and thus are undertaken.
  • Alternatively a financial asset or a project resulting in negative NPV must be rejected since it would reduce shareholder's wealth.
  • If one out of a variety of projects is to be chosen the one with the highest NPV is adopted.

The NPV is able to be computed with the help of the following formula:

  A1                             A2                   An

W = ------ + ------ + ------- + -------  - C

(1+K)1                    (1+K)2                (1+K)n

W = Net Present Worth

A1, A2,--An = Stream of Cash Flows

K = Appropriate discount rate to calculate risk and time factors

C = Initial outlay to obtain an asset or pursue a course of action.

Posted Date: 8/3/2013 3:41:15 AM | Location : United States







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